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Tuesday,
March 17, 2020/ 02:30PM / TheAnalyst / Proshare Research Image Header Credit: EcoGraphics
Against
the background of global Central Banks cutting interest rates and buying back domestic
treasuries (T-bills and bonds), Nigeria's Central Bank recently announced six
strategic policy initiatives to head off a recessionary dip as the Coronavirus
pandemic takes a toll on global economies and threatens to lead them into a
recession.
The CBN's six policies include the following (see table 1 below):
Table 1 CBN's
Coronavirus - induced Policy Response; A Poor Time To Die
CBN and The Rest of The World
Analysts
believe that the CBN policy response to the Coronavirus or COVID-19 was late.
The argument was that the central bank needed to have anticipated the
consequences of an economic slowdown and put a counter-recessionary monetary
framework in place as early as the first known incident of the virus in
February 2020. This may be somewhat of a stretch. The problem with the COVID-19
virus response by global central banks is that they have adopted rapid monetary
policy action to what remains a public health pandemic.
The
challenge is not stimulating growth by way of lower interest rates and increased
money supply but by taking charge of the pandemic by limiting and reversing its
spread. The slowing down of the disease is a health management problem and not an economic problem. The use of monetary and fiscal tools can only
prove effective when supply chains are settled and manufacturers start up
production. The revival of production would require re-establishing forward
contracts and ensuring that demand cycles are restored. The point of relevance
of interest rate cuts and money supply growth would be to reduce production
costs and improve demand (see illustration 1 below).
Illustration
1 Nigeria's Budget 2020,
Recessionary Troubles Ahead
In the
last two-weeks central banks around the world have announced bold rate
reductions but this has not inspired manufacturing output and growth as the
effects of the virus has led to a shutdown of economic activities in Asia, the
Americas and Europe. To make matters worse a festering price war in the
international oil market between Saudi Arabia and Russia has sent oil prices
diving to prices last seen during the global economic recession in 2016. As of
Wednesday, March 18, 2020 oil prices dipped to US$27.88 per barrel for Brent
Crude and US$25.32 per barrel for West Texas Intermediate (WTI). The
coordinated global attempt at containing a looming recession is courageous but
ineffectual (see policies of global central
banks in table 2 below).
Table 2 Global Central Bank's Anti-Recession
Policies: Looking Through Dark Glasses
Source:
CNBC, Reuters, Wall Street Journal, Proshare Research
Africa's Delayed Hard Luck
Africa,
until last week, had shown disdain for the global spread of COVID-19. The
continent appeared to be in suspended animation as the rest of the world
struggled to contain the virus. Unfortunately, that lack of strong and
assertive policy action may usher in the continents darkest months as the virus
gains momentum and stretches the continents phenomenally weak health
infrastructure to its limits. Nigeria's early response was smart but inadequate.
The government appeared to be more concerned with optics than the grave
economic and social disruption staring the country in the face. After the first
index case was successfully identified and contained, rather than build on the
protocols and improve the infrastructural and human preparedness the
governments at all levels took it for granted that the country had inexplicable
immunity from the disease. On Sunday, March 15, 2020, a 70-year lady that
travelled back to Nigeria after visiting her children in the United Kingdom
tested negative for COVID-19 but died in Enugu. The death was alleged to be the
consequence of poor management of the case and the excessive trauma suffered by
the senior citizen. The Enugu incident was symptomatic of the overall challenge
of managing the virus in both Nigeria and the rest of Africa.
In fact,
as at Wednesday, March 18, 2020 Nigeria recorded five additional cases of the
virus, resulting from Nigerians returning from either the UK or USA. The new
cases brought the total number of confirmed cases of COVID-19 in Nigeria to 8.
The rise in the number of cases reflects the slow decision to place travel
restrictions on people coming from countries with high incidences of the virus.
The government only placed a travel ban on the following countries after the
new cases were announced:
Nigeria,
Africa's largest economy by real gross domestic product (GDP) may soon witness
major supply chain disruptions, production shutdowns, job losses (permanent and
temporary), a rise in inflation (inflation rate for February 2020 was +12.20% up from +12.13%
in January 2020) and a collapse of the public health system puts
pressure on the five (5) special virus containment and intervention centres.
The
challenge of COVID-19 containment in countries like Nigeria, Algeria, Egypt,
and South Africa mean that Africa would need to ramp up its efforts at ensuring
that the virus does not spread much further as their relatively weak health
infrastructure would prove inadequate. The poor health structures would be
further endangered by underlying economic weaknesses.
Coronanomics and its Many Troubles
African
economies will go into recession as dwindling oil prices put added revenue
pressures on countries like Nigeria and Angola. Both Nigeria and Angola will
see their foreign reserves fall (Nigeria's foreign reserve currently hovers
slightly above US$36bn) and their currencies slide as additions to reserves
thin down as oil prices tumble. South Africa is already in the thick of a
recession that may get worse if exports slow down considerably and export
prices slump. Egypt is in the same position as other oil producing African
countries but with a better foreign exchange outlook.
In
Nigeria, the central bank's expansionary monetary policy would not work as oil,
the country's largest foreign exchange earner and export, is currently trapped in
a buyers-market meaning that the
country has no wiggle room to increase either output or price. No matter how
much the CBN cuts domestic interest rates the Bank will be incapable of
stimulating growth as production is clamped by both low demand and inadequate
supply chain deliveries, an outcome witnessed by many other countries in Q1
2020.
The
Nigerian budget for 2020 has been torn in tatters. The economy will witness
both lower revenues and lower expenditures (a tendency towards recession) and
would likely see a rise in domestic prices and a fall in the external value of
the Naira (see illustration 2 below).
This would present the classic case of inflationary stagnation or "stagflation" which is a recession
accompanied by rising average monthly or annual prices.
Illustration
2 A Helicopter view of the Impact
of Coronavirus in Q1 2020
In its policy
response, the CBN granted DMB's leave to consider temporary and time-limited
restructuring of tenor and loan terms of businesses in oil and gas, agriculture
and manufacturing as well as households affected by the outbreak of COVID-19.
The problem with this policy is that it does not clarify if there are outlined
incentives/relieves that will be given to commercial banks to enable them carry
out this operation. A major issue arising from this policy is that the sectors
outlined to benefit from this policy are forecasted to be negatively affected
by the coronavirus. The fall in the global oil demand as well as the price war
between Saudi-Arabia and Russia has negatively affected the oil sector.
Also, Nigeria's manufacturing sector will be negatively affected as a result of disruptions in global supply chains. It is worthy of note that 'root cause analysis' would suggest that the CBN's influence over manufacturing sector has limitations. Latest Q4 2019 data reveals that 73.13% of Nigeria's import are manufactured goods and the majority of Nigeria's SME's depend on importation (see table 3 below).
Table 1: Nigeria's Sectors % Share of Total Imports
Sectors | Q4 2019 | % Share of Total Imports |
Agricultural Goods | 233,330.20 | 4.36 |
Raw Materials Goods | 335,811.12 | 6.28 |
Solid Mineral Goods | 18,487.56 | 0.35 |
Energy Goods | 9.73 | 0.00 |
Manufactured Goods | 3,912,209.65 | 73.13 |
Crude Oil | 0.00 | 0.00 |
Other Petroleum Oil products | 849,780.36 | 15.88 |
Total | 5,349,628.63 | 100.00 |
Source: NBS, Proshare
Research
A major
highlight from the CBN's policy response is that it fails to provide clarity on
how it intends to strengthen the loan to deposit ratio (LDR) of banks already
squirming under the prevailing 65% ratio. DMBs have already struggled to meet
the present LDR requirement, a further increase of the LDR would create
problems of adverse
selection and moral hazard.
The fixed
income market, however, looks sober but normal. Nigeria's 10-year government
bonds have a 13.248% yield. The 10 year versus 2-year spread is 524.6 basis
points. This shows a normal convexity in long-term versus short-term
maturities. The CBN rate is 13.5%. Nigeria's Standard & Poor rating is
B.
What
can CBN do better?
To get out of the bind the fiscal and monetary policy makers must start with a root cause analysis. The problem is one of heath care management which means policies must be put in place to contain the spread of the virus, this is the first order role of the government. The country's medical facilities must be quickly scaled up across the country's six geopolitical zones, health care professionals must be paid special allowances to compensate for the additional hazards of patient treatment under the circumstances and public gatherings should be curtailed to the barest minimum. The curtailment of movement has helped countries like China, Italy and Taiwan get a hold over the spread of COVID-19.
The CBN may need to do the following to provide future positive outcomes with monetary policy:
The world and
Nigeria is going into uncharted territories and the best way forward is to
think, fast, act faster and seek clarity in continuous and reinforcing decision
loops.
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